ANZ Finance blog | The Blank Cheque Boom

The Blank Cheque Boom

Published 12 November 2021

By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland

The Blank Cheque Boom -- McGraw Hill ANZ Finance Blog

Amid the pandemic-induced turmoil of 2020, there was a boom taking place. This was the so-called blank cheque (or “check” in American English) boom. The investment vehicle in play is called the SPAC, Special Purpose Acquisition Company.

When a company wants to go public and list on the stock exchange, it undertakes an initial public offering (IPO). This is quite an onerous process. In the past, one way around the IPO process has been to do a ‘reverse merger’. This is where a private company buys a listed company, thereby gaining a stock exchange listing without an IPO.

"The SPAC is similar in spirit but the reverse of the reverse merger. That is, the SPAC is formed as an empty shell."

Usually, the listed company that is the target of the reverse merger is an empty shell. It could have once been a prosperous company that has fallen away to be worth pennies on the dollar, or it might have been one of the many companies that just never really made it. The market capitalisation might be so low that buying it ends up being cheaper than the IPO process for the owners of the private business seeking a stock exchange listing.

The SPAC is similar in spirit but the reverse of the reverse merger. That is, the SPAC is formed as an empty shell. It raises funds during an IPO. The sole purpose of the new SPAC is to one day acquire another company, bringing a private company public with a stock exchange listing but with the twist that the empty shell is the hunter rather than the hunted.

"$25 billion flowed into SPACs in January alone and more than $100 billion over the course of the year."

We mentioned some numbers in other instalments that can be used to place SPACs in perspective. Everyone seems to be talking about FinTech. Globally in 2020, around $90 billion is reported to have flowed into the FinTech industry. SPACs, which relatively few people are talking about, essentially matched that investment amount, with $83 billion reportedly flowing into SPACs in 2020. But the best was yet to come.

2021 began strongly for SPACs as the blank cheque boom continued. $25 billion flowed into SPACs in January alone and more than $100 billion over the course of the year. That is serious money.

The way that SPACs work is straightforward. Once the money is raised and the SPAC gains its listing, it begins looking for a target. A SPAC is not open-ended. Usually, the SPAC has 2 years to find an appropriate acquisition. If it fails to do so, it is wound up and the capital is returned to investors. If it finds a target, the acquisition is negotiated, and the target company’s management team will often retain a role within the SPAC. It seems that investors see a multitude of possibilities and funds continue to flow.

While many SPAC stories can be found across the American business media if one goes looking for them, it seems fitting to mention a SPAC with a crypto connection that was making news in November 2021. It was announced that Monex Group Inc (a Japanese firm) would list its US trading subsidiary TradeStation Group Inc through a $1.43 billion SPAC, partnering with crypto billionaire Michael Novogratz. This SPAC deal is just one of many that has sent the stock prices of relevant parties soaring. At least for now.

Discussion Question

Can the blank cheque boom last? Can you find some examples of other prominent SPAC deals from 2021?

Further Reading

Traditional IPOs are discussed in Chapter 5 of the text. While SPACs are attention-grabbing, traditional IPOs remain popular. Around $90 billion was raised in the United States through IPOs in 2021. That’s also very serious money (on top of $80 billion in 2020).